Kinsale Capital Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. Kinsale is a U.S. excess and surplus lines insurer focused on hard-to-place commercial and personal risks, distributed mainly through independent brokers.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Gross written premiums | $223.2 million | $188.5 million |
| Net earned premiums | $176.1 million | $133.8 million |
| Total revenues | $186.8 million | $141.6 million |
| Net income | $24.9 million | $26.2 million |
| Diluted EPS | $1.16 | $0.56 common stock |
| Underwriting income | $28.2 million | $34.3 million |
| Loss / expense / combined ratio | 58.9% / 25.1% / 84.0% | 53.0% / 21.3% / 74.3% |
| Return on equity | 11.1% | 16.2% |
Gross written premiums increased 18.4%; net earned premiums increased 31.6%. Net income declined 4.8% and underwriting income declined 17.7%. The combined ratio remained below 100%, indicating an underwriting profit, but deteriorated year over year. Comparisons are affected by the multi-line quota-share reinsurance treaty (MLQS): it was not renewed for 2017 and was fully commuted by January 2017. Excluding MLQS effects, 2016 adjusted combined ratio was 76.8%, versus 84.0% in 2017.
2017 catastrophe losses net of reinsurance were $9.0 million, primarily from Hurricanes Harvey and Irma. Favorable prior-year reserve development was $11.3 million, below the $12.7 million in 2016. Investment income rose 41.2% to $10.6 million, largely reflecting a larger investment portfolio.
Fourth-quarter results
For the fourth quarter of 2017, gross written premiums were $56.9 million, total revenues $50.7 million, net income $5.9 million, and diluted EPS $0.27. Fourth-quarter 2016 figures were $47.5 million, $40.4 million, $6.9 million, and $0.32, respectively.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $77.4 million; investing cash outflow was $42.4 million; financing cash outflow was $4.0 million.
- Cash and cash equivalents were $81.7 million; total cash and invested assets were $561.1 million, up from $480.3 million in 2016.
- Total assets were $667.8 million; stockholders’ equity was $238.2 million. The company had no credit agreements or debt outstanding at year-end; it repaid its remaining term loan in December 2016.
- Gross loss and loss-adjustment reserves were $315.7 million, including $267.5 million net of reinsurance. About 81% of net reserves were incurred but not reported (IBNR).
- Management said liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months. Kinsale Insurance paid $4.5 million in dividends to the holding company during 2017; up to $23.7 million could be paid in 2018 without regulatory approval, subject to statutory conditions.
Outlook, commentary, and notable items
- Management’s stated long-term goal is a return on equity in the mid-teens, supported by profitable growth, disciplined underwriting, cost control, and technology. The filing gives no specific premium, earnings, or combined-ratio guidance.
- The Tax Cuts and Jobs Act lowered the federal corporate tax rate to 21% effective in 2018. The company expects its 2018 effective tax rate to be significantly lower than 2017’s 35.4%. Re-measurement of deferred taxes added $1.9 million to 2017 tax expense; a $3.5 million transition adjustment for loss-reserve discounting was provisional pending further Treasury guidance.
- The board declared a $0.07 per-share dividend in February 2018, payable in March, compared with $0.06 quarterly dividends during 2017. Future dividends remain discretionary and depend partly on insurer-subsidiary distributions and regulatory limits.
- Property represented 6.6% of 2017 gross written premiums; casualty represented 93.4%. The insurer maintained an “A-” (Excellent) A.M. Best financial-strength rating. Five reinsurers represented 92.4% of the net reinsurance receivable balance.
- Principal risks include reserve-estimation uncertainty and long-tailed claims, catastrophe exposure, reinsurance collectability and availability, dependence on a small group of brokers, E&S market cycles and competition, investment-market risk, regulation, and technology/cybersecurity risks. California, Texas, and Florida together represented 52.6% of premiums.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The company reported no material litigation expected to adversely affect its financial condition or results.
Key facts for investors to verify
- Whether reserve adequacy and favorable prior-year development persist; assess the significance of IBNR and the disclosed reserve sensitivities.
- How the 2017 catastrophe losses and higher loss ratio affect pricing, renewal quality, and future underwriting margins.
- Underlying performance on a consistent basis given the MLQS termination and commutations, especially when comparing combined ratios and underwriting income.
- Reinsurance concentration and counterparty exposure, plus broker concentration and the company’s ability to sustain premium growth.
- The realized effect of the 2018 tax-law changes and investment-market movements on earnings, equity, and dividend capacity.